Strips, floaters and the road to Emu
The Spanish government is expected to open at least two new markets this year to provide the fixed-income sector with greater depth and liquidity. Jules Stewart reports on the interest generated as the treasury casts off its cumbersome traditional approach to borrowing.
The Spanish treasury has unveiled a plan to revamp the country's capital markets in an attempt to attract new investors and cut the cost of borrowing. The scheme involves modernizing the municipal bond market and is one of a series of reforms designed to increase Spain's chances of joining the first wave of European monetary union.
"We are considering the introduction of floating-rate notes," says treasury director general Jaime Caruana. "We started issuing short-term six-month letras (T-bills) in September and investors now have an auction calendar that reflects market demand on a regular basis. Plans for strips are in an advanced stage although we first have to tackle some of the tax matters involved."
Henrik Lumholdt, chief economist at Bank of America in Madrid, believes that strips will be the first new product to be launched and this will probably be the most beneficial of the planned changes. "They will add liquidity and enable investors to match their requirements more reliably. They will also help to arbitrage the market," he says.
There have already been several piecemeal reforms to the Spanish market over the past five years which have helped improve efficiency.